Is child support taxable income? The question of whether child support is tax deductible comes up a lot by both people who pay child support and those who receive it.
The simple answer is, no, child support is not taxable income.
Child support is not tax deductible, but let’s unpack child support and taxable income a bit more to clarify why.
What is child support?
Usually, child support is the payment the parent with higher income pays to support the child. These payments can be cash or non-cash payments, and cover child expenses such as food, clothing, medical costs, housing, school costs and costs related to other activities.
If the parties have more than one child, the parent paying child support will have to pay for each child. It is not necessary that the parent will pay the same amount of child support for each child – some children may require more expenses than others.
A child that gets married or enters into a De Facto relationship is not eligible for child support.
How is child support calculated?
When asking the question “Is child support taxable income” you will also want to know, how child support is calculated.
Child support is often calculated by the Department of Human Services (DHS). In order to calculate the amount of payable child support, the DHS will conduct an assessment to determine which parent needs to make the payments. The assessment outcome is based on both parents’ incomes and their care contributions, and the needs and wellbeing of the specific child.
The DHS obtains information about your income from the ATO. They base the child support payment on your adjusted taxable income for the last financial year. Adjusted taxable income includes your taxable income, foreign income, and reportable superannuation contributions
If you haven’t lodged your tax returns before the child support period, the DHS will estimate what your income is and make calculations accordingly regarding your taxable income. So, if you’re likely to be the one making child support payments, it’s important to lodge your tax returns on time.
If the parent who is receiving the child support payments feels that there needs to be adjustment to the amount payable, they can apply to the DHS to change the assessment.
Alternatively, parents can decide to self-manage child support, and thus not enlist the service of the DHS. So, instead of having the DHS determine how much child support is paid and who pays it, the parents can make an arrangement amongst themselves that covers who pays support and what the amount is.
Is child support taxable income – why not?
Taxable income is the income earned from your wages, investments, a business (if applicable) and any taxable government payments.
If you are the recipient of child support, you’re not receiving this payment as part of your earned income, so it is not taxable. They’re also considered private, or domestic in nature.
Spousal maintenance, like child support, is also not considered taxable income.
If you are the parent paying child support, you have to pay the amount after your income is taxed. Some people opt to set up a child maintenance trust to circumvent this because it allows them to place money into the trust per their gross income.
If you have questions about child support or need some advice, get in touch with one of our family lawyers here for a free and confidential consultation.
Principal of Justice Family Lawyers, Hayder specialises in complex parenting and property family law matters. He is based in Sydney and holds a Bachelor of Law and Bachelor of Communications from UTS.